Sterling Area

The sterling area or sterling zone refers to a group of countries, often dominions and colonies of the former British Empire (and Commonwealth), which either use the British pound sterling as their currency, or peg their respective currencies to the British pound.

At one time the zone encompassed virtually the whole British Empire and many other countries besides. The rise of the U. S., the economic effects of the two world wars, the decline of the British Empire and the end of the Bretton Woods system significantly changed both sterling's position as a world currency and the desire of countries in general to maintain such currency pegs. Today the zone only encompasses a few remaining British possessions.

Why was there a zone?

By the turn of the 20th century, Britain was the pre-eminent world power economically, militarily, and in the size and importance of her empire. It was a product of this rise to pre-eminence that the pound sterling became the world's reserve currency, the currency in which many international transactions were made, and a currency backed by a gold standard. Most countries of the British Empire either used the pound sterling as their currency, or pegged their currencies to sterling, more out of economic convenience than imperial allegiance. Other countries also voluntarily chose to do the same.

The decline of the zone

The shattering effects of two World Wars on Britain's economy, coupled with the relative decline of Britain as a world power, the ending of the era of the European empires and the economic and military ascendancy of the U. S., lead to the US dollar taking over the role as the world's reserve currency by the second half of the 20th Century. The position of the dollar at the centre of the post-WW2 Bretton Woods system of fixed exchange rates cemented this. During Britain's long withdrawal from Empire after this time, some countries chose to withdraw from the zone, but many newly-independent Commonwealth countries chose to remain in the zone with their currencies pegged to Sterling. Rhodesia is unusual in that it was expelled from the zone when it unilaterally declared independence from Britain in 1965.

1972: the effective end

The terms of the treaty of accession of the UK to the European Community (then known as the EEC) required the dismantling of the sterling zone, indeed this had been a sticking point in the negotiations to join the EEC that had been ongoing for many years in the 1960s and early 1970s. The existence of the Sterling zone as a global currency bloc had been deemed by some existing members, particularly the French, as an early demonstration of Britain's allegiances not being sufficiently European. It was thought that the existence of the zone and the trading relationships that it implied would be an impediment to Britain's economy becoming more integrated with continental Europe's. It was also thought that the large amounts of sterling held by other countries' central banks and in circulation in other countries, the so-called problem of the "sterling balances", might de-stabilise the European economy. These arguments were surprising given France's maintenance of the CFA Franc in a group of its former colonies, albeit much smaller than the sterling zone.

However the de facto end of the Bretton Woods system of exchange rates fixed to the US dollar, precipitated by the dollar's move off the gold standard in 1971, meant that the end of the sterling zone as a global currency bloc had become inevitable in any case. On 23rd June 1972 sterling joined many other global currencies and floated against the dollar: the majority of the remaining sterling zone currencies took the opportunity to leave the zone and float freely also, though a few pegged to the dollar. The UK eventually joined the EEC in 1973.

Remaining members

At the present time, Gibraltar and the islands of Guernsey, Jersey, Saint Helena, the Falkland Islands and the Isle of Man, which are not part of the United Kingdom, issue their own currencies, which are fixed to the value of sterling. None of these regional banknotes or coinages are legal tender outside their own region or, in particular, in the UK, but they may circulate freely in other jurisdictions. In the UK, these currencies are commonly accepted by large businesses and banks, or are sometimes accepted unknowingly â€" for example, many vending machines cannot distinguish between UK coins and those from outside the UK. An exchange commission may be charged if used at a bank or a large business.

Former members

Sterling Area: Encyclopedia BETA